Why Sirius XM is Buying Pandora for $3.5 Billion

Sirius XM Holdings Inc. (SIRI) has agreed to buy on-demand music streaming industry pioneer Pandora Media Inc. (P) for $3.5 billion in an all-share deal, reflecting a strategic move for the entertainment companies to consolidate and hedge against new competition within an evolving media landscape. Both companies announced the decision on Monday in press releases.

The online radio deal, expected to close in the first quarter of next year, implies a share price of $10.14 for Pandora. Shares of the Oakland, Calif.-based music streaming company have jumped 2% to $9.28 on the news as of Monday morning, reflecting a whopping 92.4% gain year-to-date (YTD), compared to the S&P 500's 9.1% return over the same period.

World's Largest Audio Entertainment Company to Take on Spotify, Apple

In 2017, Sirius XM invested $480 million in Pandora for a 19% stake in the music streaming platform, leading to speculation that Pandora could join Sirius' portfolio as its first full-on streaming service. Sirius suggests that Pandora's platform compliments its existing radio services, including an internet-only subscription.

As for Pandora, the deal marks the firm's ongoing defensive battle against new players such as deep-pocketed tech titan Apple Inc. (AAPL) and European music streaming giant Spotify Technology S.A. (SPOT), which began trading on the New York Stock Exchange (NYSE) in April.

In the three month period ended June, the Stockholm-based market leader posted 8 million new subscribers, taking its total paying subscribers to 83 million with an average revenue per unit (ARPU) of $5.83. Meanwhile, Apple's Tim Cook told investors last month that the iPhone maker is "moving along at a very, very good rate" with Apple Music, said to have over 50 million subscribers. In February, The Wall Street Journal reported that Apple Music was set to overtake Spotify in U.S. paid subscribers, growing at a monthly rate of 5% versus 2%, respectively.

A combination of Sirius XM and Pandora would create an entity with around 40 million global audio subscribers, based on Sirus' and Pandora's Q2 reports, broken down between the former with 33.5 million customers and $13.30 in ARPU and the latter with 5.98 million subscribers and a $6.52 ARPU.

Pandora Chief Executive Officer (CEO) Roger Lynch indicated that the deal will better position the company to lead in digital audio, specifically by growing its advertising business and expanding its subscription offerings.

"The powerful combination of SiriusXM's content, position in the car, and premium subscription products, along with the biggest audio streaming service in the U.S., will create the world's largest audio entertainment company," said Lynch.